October 09, 2014
| Subscribers Only

Comcast and Time Warner Cable are a step closer to merging, the proposed transaction now hinging on regulatory approval. Shareholders of Comcast and TWC overwhelmingly approved the merger of the two largest cable companies in the USA. Both companies announced that 99 per cent of shareholders had approved terms of the deal that will see Comcast issue 2.875 shares of Comcast Class A stock for each share of Time Warner Cable.

The merger has yet to be approved, and needs to be signed off on by the Department of Justice (DOJ) and the FCC, which began their reviews on March 2014 and April 2014 respectively. Upon regulatory approval, Comcast expects to close the merger in early 2015.

Comcast has been proactive in taking steps to satisfy regulatory concerns, and in April 2014, it announced that it will divest 3.9 million post-merger subscribers in two separate transactions. Comcast will sell 1.4 million subscribers to Charter Communications and will spin off 2.5 million subscribers into a separate publicly traded company called GreatLand Connections Inc.

Comcast shareholders will own 67 percent of GreatLand Connections, with Charter owning the remaining 33 percent. However, Charter will have operating and managerial control of the new company. The transaction will allow a combined Comcast and Time Warner Cable to own nearly 29 million subscribers.

Shareholder approval was almost a given for both companies For Comcast shareholders the combination offers the opportunity to own nearly 30 percent of all domestic pay TV video subscribers. TWC shareholders are being bought out at a good price for a company which is suffering under the onslaught of new IPTV players. That's not to say that Comcast isn't suffering at the hands of IPTV, but it has been more successful holding its own than TWC.

Both AT&T U-verse and Verizon FiOS compete with TWC in many major markets like NYC, Los Angeles and El Paso. For TWC the battle has been largely one-sided with IPTV players gobbling up subscribers at a terrific pace, even mature IPTV markets (more than 35% IPTV penetration) are continuing to experience the shift of TWC subscribers to IPTV.

IHS believes that the newly combined company will be able to better fend off the threat to TWC subscribers than TWC alone thanks to Comcast's recent efforts to beef up its customer experience. The combined entity will also benefit from operational synergies, but more importantly, it will be in a better position to battle increasing programming costs.

With sports rights costs increasing at extraordinary rates and carriage fees rising modestly every year, the company may leverage its ownership of 30 percent of pay TV subscribers to keep costs under control. But, programming costs will inevitably increase even for a company the size of the combined entity. At the same time Comcast is likely to be able to increase ARPU almost immediately for former TWC, directly in relation to the speed by which customers are exposed to advanced technologies like the X1 cloud DVR.